The Case for Social Security Personal Accounts

There are two crises facing Social Security. First the program has a gigantic unfunded liability, largely caused by demographics. Second, the program is a very bad deal for younger workers, making them pay record amounts of tax in exchange for comparatively meager benefits. This video explains how personal accounts can solve both problems, and also notes that nations as varied as Australia, Chile, Sweden, and Hong Kong have implemented this pro-growth reform.

Social Security reform received a good bit of attention in the past two decades. President Clinton openly flirted with the idea, and President Bush explicitly endorsed the concept. But it has faded from the public square in recent years. But this may be about to change. Personal accounts are part of Congressman Paul Ryan’s Roadmap proposal, and recent polls show continued strong support for letting younger workers shift some of their payroll taxes to individual accounts.

Equally important, the American people understand that Social Security’s finances are unsustainable. They may not know specific numbers, but they know politicians have created a house of cards, which is why jokes about the system are so easily understandable.

President Obama thinks the answer is higher taxes, which is hardly a surprise. But making people pay more is hardly an attractive option, unless you’re the type of person who thinks it’s okay to give people a hamburger and charge them for a steak.

Other nations have figured out the right approach. Australia began to implement personal accounts back in the mid-1980s, and the results have been remarkable. The government’s finances are stronger. National saving has increased. But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed the Chilean system, is a great summary of why personal accounts are necessary. All told, about 30 nations around the world have set up some form of personal accounts. Even Sweden, which the left usually wants to mimic, has partially privatized its Social Security system.

It also should be noted that personal accounts would be good for growth and competitiveness. Reforming a tax-and-transfer entitlement scheme into a system of private savings will boost jobs by lowering the marginal tax rate on work. Personal accounts also will boost private savings. And Social Security reform will reduce the long-run burden of government spending, something that is desperately needed if we want to avoid the kind of fiscal crisis that is afflicting European welfare states such as Greece.

Last but not least, it is important to understand that personal retirement accounts are not a free lunch. Social Security is a pay-as-you-go system, so if we let younger workers shift their payroll taxes to individual accounts, that means the money won’t be there to pay benefits to current retirees. Fulfilling the government’s promise to those retirees, as well as to older workers who wouldn’t have time to benefit from the new system, will require a lot of money over the next couple of decades, probably more than $5 trillion.

That’s a shocking number, but it’s important to remember that it would be even more expensive to bail out the current system. As I explain at the conclusion of the video, we’re in a deep hole, but it will be easier to climb out if we implement real reform.

188 Responses

Great article Dan. Agreed on all points. Interesting note is Chile’s social security has achieved annualized returns of nearly 10% while the US systems has been less than 2%, not even beating inflation.

I applaud the free-market sentiment that each of us should be responsible for his or her own Social Security account. But therein lies the problem…our growing culture of “victimhood” and the government’s increasing tendency to step in with bailouts when corporations and individuals face financial difficulty, means that privatizing Social Security could result in even larger government funding problems. One can hear the media and Congressional outcry about how we “must” help irresponsible or simply unlucky investors when they end up retiring with accounts worth less than they contributed. Think about a 5 year market downcycle with millions of people retiring with accounts that are “underwater”. Today we seem to think it is urgent to make people’s home values instantly recover if they own a property that is temporarily worth less than their mortgage. What do you think will happen when their actual retirement income source is worth less than they put in?

It is a faulty premise that every worker can or should enjoy an average of eighteen years of not working after working an average of forty. Yet that is precisely the premise behind social security. In the USA, historically, and throughout most of the world, in the present, most people work until they die. I think it would be superior public policy to dispense with Social Security and the fantasy that everyone will enjoy a retirement.

[…] right approach, by the way, is not just cutting benefits, but rather letting younger workers shift their payroll taxes into personal retirement accounts, as explained in this video that was released earlier this […]

[…] right approach, by the way, is not just cutting benefits, but rather letting younger workers shift their payroll taxes into personal retirement accounts, as explained in this video that was released earlier this […]

[…] 2. What does it mean to promise Social Security reform “if and only if the comprehensive deficit reduction bill has already received 60 votes.” Who defines reform? And why does the reform have to focus on “75-year” solvency, apparently to the exclusion of giving younger workers access to a better and more stable system? […]

[…] 2. What does it mean to promise Social Security reform “if and only if the comprehensive deficit reduction bill has already received 60 votes.” Who defines reform? And why does the reform have to focus on “75-year” solvency, apparently to the exclusion of giving younger workers access to a better and more stable system? […]

[…] videos, good reform means putting individuals back in charge and restoring market forces. It means personal retirement accounts for Social Security. It means vouchers for Medicare. And it means block-granting Medicaid back to the […]

[…] on Feb.16, 2012, under BigGovernment Early last year, the Center for Freedom and Prosperity released this video, narrated by yours truly, making the case that the United States and other nations should shift […]

This is a good video, but you could make a better case if you showed some hard numbers of an individual’s retirement fund if privately invested versus what his/her retirement “fund” would be if “invested” by the government in social security.

[…] as I explain in this set of videos. To protect America from becoming another Greece, we need personal retirement accounts for Social Security. We need vouchers for Medicare. And we need to block-grant Medicaid back to the […]

[…] The Social Security Board just released its Trustee’s Report, and it’s generated the usual hand wringing about the program’s long-term demise – much of which is perfectly appropriate for reasons I’ve already discussed. […]

[…] be fewer workers in the future. That’s a very compelling reason why it is important to expand personal retirement accounts and allow the “pre-funding” of healthcare. It’s a simple matter of demographic […]

[…] be fewer workers in the future. That’s a very compelling reason why it is important to expand personal retirement accounts and allow the “pre-funding” of healthcare. It’s a simple matter of demographic […]

[…] That being said, I wouldn’t mind giving politicians all sorts of expensive perks if they did things that advanced freedom. So Hollande could upgrade his car if he gave the French people a flat tax. And Boehner could take the private jet out of mothballs if he allowed Americans to shift their payroll taxes to personal retirement accounts. […]

[…] reforms. Many people in the policy world are at least vaguely familiar with the system of personal retirement accounts that was introduced in the early 1980s, but we explain in the article that pension reform was just […]

[…] reforms. Many people in the policy world are at least vaguely familiar with the system of personal retirement accounts that was introduced in the early 1980s, but we explain in the article that pension reform was just […]

[…] did get his health plan through Congress, but its costs, fortunately, pale in comparison to Social Security and its $30 trillion long-run deficit. And the Dodd-Frank bailout bill is peanuts compared to all the intervention of Roosevelt’s New […]

[…] did get his health plan through Congress, but its costs, fortunately, pale in comparison to Social Security and its $30 trillion long-run deficit. And the Dodd-Frank bailout bill is peanuts compared to all the intervention of Roosevelt’s New […]

[…] did get his health plan through Congress, but its costs, fortunately, pale in comparison to Social Security and its $30 trillion long-run deficit. And the Dodd-Frank bailout bill is peanuts compared to all the intervention of Roosevelt’s New […]

[…] did get his health plan through Congress, but its costs, fortunately, pale in comparison to Social Security and its $30 trillion long-run deficit. And the Dodd-Frank bailout bill is peanuts compared to all the intervention of Roosevelt’s New […]

[…] United States still ranks above Sweden, even though the Swedes have implemented school choice and personal retirement accounts. And America still ranks above the Slovak Republic, even though that country (at least for now) has […]

[…] in Ryan’s budget, but we also know that George W. Bush (for all his other faults) supported personal accounts in 2000 and 2004 and didn’t suffer any political backlash. Indeed, personal accounts still […]

[…] But I do agree with Michael that payroll taxes are too high (not that this is what he really thinks), though I should have echoed my January 2 post and said that those taxes should be reduced as part of genuine Social Security reform. […]

[…] reduce cost-of-living adjustments for Social Security, but that would be a substitute for the reforms that are needed to both control costs and give workers the option to boost retirement income with personal […]

[…] Greek-style fiscal chaos, there’s no doubt that entitlement programs will be the main factor. Social Security, Medicare, Medicaid, and Disability are all fiscal train wrecks today, and the long-run outlook for […]

[…] Greek-style fiscal chaos, there’s no doubt that entitlement programs will be the main factor. Social Security, Medicare, Medicaid, and Disability are all fiscal train wrecks today, and the long-run outlook for […]

[…] Greek-style fiscal chaos, there’s no doubt that entitlement programs will be the main factor. Social Security, Medicare, Medicaid, and Disability are all fiscal train wrecks today, and the long-run outlook for […]

[…] accounts. I’m glad they embrace Medicare reform, but I’m puzzled by the hostility to personal retirement accounts. If you increase the retirement age and/or means test, you force people to pay more and get less, […]

[…] private accounts. I’m glad they embrace Medicare reform, but I’m puzzled by the hostility to personal retirement accounts. If you increase the retirement age and/or means test, youforce people to pay more and get less, […]

[…] Social Security system rather than replace the existing tax-and-transfer entitlement system with personal retirement accounts. And while the plan contains a flat tax, it’s not the pure Hall-Rabushka version. One of the […]

[…] Social Security system rather than replace the existing tax-and-transfer entitlement system with personal retirement accounts. And while the plan contains a flat tax, it’s not the pure Hall-Rabushka version. One of the […]

[…] in Ryan’s budget, but we also know that George W. Bush (for all his other faults) supported personal accounts in 2000 and 2004 and didn’t suffer any political backlash. Indeed, personal accounts still seem […]

[…] P.P.S. Replacing the welfare state with a (hopefully shrinking) block grant only addresses the problem of “means-tested” programs. If you also want to solve the problem of old-age entitlements, that requires Medicare reform and Social Security reform. […]

[…] Greek-style fiscal chaos, there’s no doubt that entitlement programs will be the main factor. Social Security, Medicare, Medicaid, and Disability are all fiscal train wrecks today, and the long-run outlook […]

“unless you’re the type of person who thinks it’s okay to give people a hamburger and charge them for a steak.”

This is exactly what is happening in all of the bankrupt countries. And you’re told you had better get used to it, and even enjoy it. In much of Europe, “it’s not my problem” is now a national refrain. Entire cultures are being brainwashed by the government to claim responsibility for nothing so that politicians can stick the greedy rich guy with the exact phenomenon you speak of.

[…] private accounts. I’m glad they embrace Medicare reform, but I’m puzzled by the hostility to personal retirement accounts. If you increase the retirement age and/or means test, youforce people to pay more and get less, […]

[…] on this one. The theory of age-related “social insurance” programs such as Medicare and Social Security is that people pay into the programs while young and then get benefits when they are old. This is […]

[…] that we have a government-run rail company in America, a government-run postal service, a government-run retirement system, and a government-run air traffic control system, all of which would be better in the private […]

[…] Social Security was created in the mid-1930s and Medicare and Medicaid were adopted in the mid-1960s. And if you pay close attention to the above image, you’ll see that America had a “population pyramid” during those periods, meaning that there were comparatively few old people, plenty of workers, and then even larger generations of children (i.e., future workers and taxpayers). […]

[…] Social Security was created in the mid-1930s and Medicare and Medicaid were adopted in the mid-1960s. And if you pay close attention to the above image, you’ll see that America had a “population pyramid” during those periods, meaning that there were comparatively few old people, plenty of workers, and then even larger generations of children (i.e., future workers and taxpayers). […]

[…] have monopolies in America, it’s because of government. Just think of the Postal Service. Or Social Security. Or the air traffic control system. Those are all things that should be handled by the private […]

[…] That being said, if their concern about inequality is legitimate and not just for purposes of demagoguery, I expect them to read the ECB working paper discussed above and add their voice in support of a smaller welfare state and in favor of Social Security reform. […]

[…] That being said, if their concern about inequality is legitimate and not just for purposes of demagoguery, I expect them to read the ECB working paper discussed above and add their voice in support of a smaller welfare state and in favor of Social Security reform. […]

[…] After all, we have a government-run rail company in America, a government-run postal service, a government-run retirement system, and a government-run air traffic control system, all things that would function far more […]

[…] other interactions with – these activists, I have never detected any measurable hostility to Social Security reform and Medicare reform. Fixing those programs may not be at the top of their agenda, but they’re […]

[…] and other interactions with – these activists, I have never detected any measurable hostility to Social Security reform and Medicare reform. Fixing those programs may not be at the top of their agenda, but they’re not […]

[…] long-term threat to America’s economy? Trump certainly gives the impression that he thinks Social Security, Medicare, and Medicaid don’t need to be reformed. Is he really serious when he makes this […]

[…] long-term threat to America’s economy? Trump certainly gives the impression that he thinks Social Security, Medicare, and Medicaid don’t need to be reformed. Is he really serious when he makes this […]

[…] long-term threat to America’s economy? Trump certainly gives the impression that he thinksSocial Security, Medicare, andMedicaid don’t need to be reformed. Is he really serious when he makes this […]

[…] That being said, I’m not sure whether using a different word or phrase will make a big difference. I remember when Social Security reform was a big issue between 1995-2005. Proponents were repeatedly told that “private” and “privatization” were words to avoid, so we all dutifully said we were for “personal retirement accounts.” […]

[…] long-term threat to America’s economy? Trump certainly gives the impression that he thinksSocial Security, Medicare, andMedicaid don’t need to be reformed. Is he really serious when he makes this […]

[…] for personal retirement accounts. It shifted from a failed pay-as-you-go tax-and-transfer to a funded system of personal accounts. Workers were given the opportunity to stay in the old system, but more than 95 percent realized it […]

If those in Congress was pay what Social Security pay and stop wasting money and do their job. That would save Social Security. Why don’t those in Congress look at all the law made in Congress and take the one off they don’t enforce. Congress doing ever thing but it job.
Congress job is to over look the law of the land and Government spending. Not to Benefit them selves in Office. They need to go back to school to read the Constitutions. It state No One in Government should benefit being in office. What have they done make law that don’t apply to them and get away with what they want. The law should apply to them just as good as to other.
Today Federal Government and State Government is a JOKE. It just Wealthy People getting their way in Government. The American People are just slavery to them paying taxes. They keep raising taxes on them so they can take more away.

[…] comprehensive entitlement reform. It’s especially doubtful that he will touch the programs (Social Security and Medicare) that provide benefits to seniors. But it’s plausible to think he might be open […]

[…] Social Security basically untouched when taxpayers and retirees would both be better off with a system of personal retirement accounts? And why is Medicare not being fundamentally reformed when the program is an ever-expanding […]

[…] Social Security basically untouched when taxpayers and retirees would both be better off with a system of personal retirement accounts? And why is Medicare not being fundamentally reformed when the program is an ever-expanding […]